German Manufacturing: Time for Change Amid Intense Competition
A span of twelve months marked by significant choices to be made
Procrastinating problems has been a longstanding tradition in the German manufacturing sector. However, in today's fiercely competitive market, this approach is no longer sustainable.
By Heidi Rohde
2024 marked a turning point for leading German industries such as automotive, chemical, and steel, with many companies witnessing sales and profit drops, job cuts, and reduced competitiveness. The gloomy news didn't stop there. These corporations, as well as numerous small and medium-sized companies, are now taking drastic measures, including cost-cutting, job losses, and partial foreign production, criticizing domestic conditions repeatedly. The culprits? Bureaucracy, labor and energy costs – all pointing towards the state. Despite the consensus among experts that renewing the framework conditions is necessary for the anticipated economic transformation, these corporations fail to accept their own responsibility.
Disappointing Performance
German traditional corporations don't impress as they grapple with escalating challenges heading into the new year. Companies like the crisis-stricken steelmaker Thyssenkrupp and iconic automotive brand VW are prime examples. Thyssenkrupp, mired in high costs and competitive disadvantages in the ever-volatile steel industry, faces these problems since the latest economic downturn in demand. The same pattern applies to VW, as the acute demand weakness in the German and European electric car market exposes the company's own long-standing shortcomings.
Questionable Solutions
These companies follow a pattern of problem postponement, historically reactionary instead of proactive. In the face of escalating operational crises, the board sounds the alarm, followed by a public tug-of-war with the workforce, and eventually, a questionable compromise - a future concept or pact – with grandiose promises and bloated numbers representing the necessary cuts. However, implementation often falters. The spin-off of Thyssenkrupp's steel division, which hangs in the balance for the company's survival, has been lingering for years. Similarly, a voluntary job reduction at VW has been repeatedly attempted without success.
Social Partnership's Limits
The situation illuminates that the traditional German social partnership model is reaching its limits. As temporary cyclical market weakness in industries could once be addressed through face-saving savings, the current situation calls for more than just temporary solutions. Geopolitical tensions are fueling trade wars, slowing the globalization of the economy, and causing problems for export powerhouse Germany. Furthermore, the competitive environment has changed significantly, with the automotive industry and parts of the machinery sector having largely lost the technological advantage they previously enjoyed.
Industry's Call to Action
The industry as a whole must respond quickly to these profound challenges. Stakeholders need to develop agile and creative concepts that address the market and competition effectively. 2025 will be a decisive year, not just politically, but for industries as well.
Insights:
- Digital Transformation and Technological Advancements: German industries face significant digital transformation challenges, requiring substantial investment and adaptation to remain competitive.
- Economic Downturn and Trade Policies:
- Economic Downturn: Germany's economy is projected to experience zero growth in 2025, marking a third consecutive year of stagnation or contraction.
- Trade Policies: U.S. trade policies, including tariffs, particularly impact the automotive sector with a 25% duty on car imports, affecting GDP growth.
- High Inflation and Material Costs: High inflation and expensive materials hinder industry competitiveness, leading to financial stress and insolvency risks.
- Weak Demand: Weak demand in core sectors, such as automotive and construction, further complicates the challenges.
Strategies for Addressing Challenges:
- Investing in Innovation: address postponed problems by investing in innovation to maintain competitiveness.
- Enhancing Supply Chain Resilience: improve supply chain flexibility to mitigate the impact of unforeseen circumstances.
- Diversifying Export Markets: reduce reliance on volatile international trade relations by diversifying markets.
Renewal of Framework Conditions:
- Government Support: provide support through policies that stimulate innovation and adjust framework conditions to improve competitiveness, such as subsidies for digital transformation and energy efficiency measures.
- Industry-led Initiatives: develop industry-led initiatives to improve production efficiency, invest in research and development, and adapt to changing market conditions.
- International Cooperation: foster stronger international partnerships and negotiate favorable trade agreements to stabilize trade relations and create growth opportunities.
Sector-Specific Challenges:
- Automotive: faces significant challenges stemming from U.S. tariffs, changing consumer preferences towards electric vehicles, and environmental concerns.
- Chemical: battles high energy costs and strict environmental regulations, necessitating investment in sustainable processes and energy-efficient technologies.
- Steel: confronts weak demand from essential sectors like construction and automotive, global overcapacity issues, and environmental concerns related to production processes.
- Despite the dire situation facing traditional German corporations like Thyssenkrupp and VW, they continue to struggle with escalating challenges in the new year, notably digital transformation, high costs, and competitive disadvantages.
- The proactive response to these challenges requires drastic action, such as investing in innovation, enhancing supply chain resilience, and diversifying export markets to mitigate risks.
- The situation calls for a renewal of the framework conditions, with government support through policies that stimulate innovation and adjust framework conditions to improve competitiveness.
- Simultaneously, industry-led initiatives are needed to improve production efficiency, invest in research and development, and adapt to changing market conditions, particularly in sectors like automotive, chemical, and steel.
